Presidential Decree No. 114, also known as the “Pawnshop Regulation Act,” sets forth a series of regulations for a pawnshop auction. These regulations are in Secion 15, which is titled “Public auction of pawned articles.” Among the regulations is one that requires all pawnshop auction to be “…under the control and direction of an auctioneer with license duly issued by the corresponding authorities…” In this case the corresponding authority is The Bangko Sentral ng Pilipinas (BSP). In other words an auction must be “under the control and direction” of an auctioneer licensed by the BSP. Or even more simply, a set of books from a pawnshop must be signed off by an auctioneer licensed by the BSP.

There are not many licensed pawnshop auctioneers in the Philippines at this time. Fortunately, for my clients, I am licensed by the BSP to sign auction books. I do this at the most competitive price in the Philippines. My price is P150 per pawnshop branch and I can sign auction books in any province. If you are having trouble with pawnshop auction compliance at a reasonable price – contact me for help.

The Handbook on Consumer Laws published by the Bangko Sentral ng Pilipinas (BSP) lays out some of the basic rights of a pawner when dealing with a pawnshop. MIM publishes them here as guidance for pawners and suggest all pawners know their rights. Also be aware that these may not be the only rights pawners have under BSP regulations.

Pawnshop Transactions

Section 4303P, MORNBFI*:

gives the right of the pawner to renew his loan for such amount and period as may be agreed upon between the pawnshop and the pawner, subject to conditions provided by the MORNBFI; it further gives the right of the pawner who fails to pay or renew his obligation to redeem his pawn ninety (90) days from the date of maturity by paying the principal amount of the loan plus the amount of interest that shall have accrued thereon

Section 4322P, MORNBFI:

requires the following information to be disclosed in the pawn ticket:

amount of the principal loan;

interest rate in percent;

period of maturity;

description of the pawn;

expiry date of redemption period; and

such other terms and conditions as may be agreed upon between the pawnshop and the pawner

Section 4323P, MORNBFI

requires the pawnshop to notify the pawner in writing on or before the expiration of the ninety (90)-day grace period:

that the pawn shall be sold or otherwise disposed of in the event that the pawner fails to redeem the pawn within the ninety (90) – day grace period; and

the date, hour and place where the sale shall take place

It further provides that the pawnshop may sell or dispose of the pawn only after it has published a notice of public auction of unredeemed articles held as security for loans in at least two (2) newspapers circulated in the city or municipality where the pawnshop has its place of business, six (6) days prior to the date set for the public auction. In remote areas where newspapers are neither published nor circulated, the publication shall be complied with by posting notices at the city hall or municipal building of the city or municipality and in two (2) other conspicuous public places where the pawnshop has its place of business.

Section 4324P, MORNBFI

requires public auctions to be held either at the pawnshop’s place of business or any public place within the territorial limits of the municipality or city where the pawnshop conducts its business

Section 4182P, MORNBFI

No pawnshop shall close or transfer its place of business within three (3) months following the maturity of any loan or pledge, or before any pawn shall have been sold or disposed of

1995 BSP data shows the total number of pawnshops in the Philippines was 4,173. More recent BSP data shows that the total number of pawnshops in the Philippines rose to 14,800 in the fourth quarter of 2009 from 13,493 [1] in the first quarter of 2008. That is a spectacular rise.

But with growth comes attention. In the case of pawnshops, that attention is now coming from regulatory agencies of the Philippine Government. To put the rise in pawnshops in between the first-quarter of 2008 and the end of 2009 in perspective we may have to look beyond the numbers.

As this January 2009 philstar.com article points out, The BSP began a mapping operation of pawnshops a couple of years ago to determine the number of unregistered pawnshops in the Philippines. These BSP inspections suggested that 26 percent of all pawnshops were unregistered. So in reality, about one-quarter of the pawnshops that registered with the BSP in 2008 and 2009 may have been pawnshops that were in existence but not registered. Once the BSP inspections began many unregistered pawnshops rushed to register to avoid BSP sanctions. That may account for a portion of the rise in pawnshops in the official BSP numbers for 2009.

In addition to finding unregistered pawnshops, The BSP inspections also suggested that about one- third of pawnshops inspected “were found to have violated rules and regulations such as failure to require signature of customers in the pawnshops’ registers, which could abet fencing; failure to attend…”

Pawnshops owners would be well-advised to consider this regulatory action by the BSP as a permanent drive to not only gets fly-by-night pawnshops registered but to begin stricter enforcement of all pawnshop regulations. The BSP will now use an integrated approach with the help of other government agencies and local governments.

The Bangko Sentral ng Pilipinas (BSP) and the Department of Interior and Local Governments as well as local government units would monitor thousands of pawnshops nationwide to prevent fencing, money laundering and other criminal activities, officials said yesterday.

Pawnshop owners have now been put on notice by the BSP that stricter regulation is coming. Do not be caught unaware. Ultimately, it is the responsibility of pawnshop owners to know what the laws are that govern pawnshops and to comply with them.

The history behind the Marcos jewelry collection doesn’t matter. Neither do the personalities behind it. Both the history and the personalities are from a sad era that is now passed. The only thing that matters now is that the jewelry collection is in the possession of the Philippine Government. I think this is where it should stay permanently as a possession of the Philippine people.

President Gloria Macapagal-Arroyo has decided to leave the sale of jewelry to the incoming administration. I support this decision for my own reasons regardless of the reasons given in the press. There have been attempts to sell the jewelry collection for some 10 years now. The jewelry collection, said to be worth P15 billion, includes a ruby pendant, a 100-carat diamond necklace and other valuable pieces. But jewelry appraisals prices have risen dramatically in value in the past ten years and in five years the collection appraisal price could double. In 10 years it could double again.

Our parents used to tell us: the moment you start earning, buy some jewelry and other properties. You can pawn them whenever you encounter financial difficulties. Mario Lamberte – 1988.

Pawnshops offer financial services known as microlending which is an important source of credit in many developing countries, especially in Asia. Pawnshops fill a void left by the banking system. They provide poor and low-income households with credit that would have not otherwise have been available and increase competition in the credit markets by providing an alternative source of credit for those who are frozen out of loans from banks. This has served as a financial safety net for the poor and low-income households.

Pawnshops can provide these financial services to poor and low-income households for a variety of reasons. One is that pawnshops fall under less regulation than other financial institutions.

Pawnshops used to operate like a sari-sari store with very little government control. In fact the only time these units came into contact with government agencies was when they paid business registration fees and income taxes. They were not even covered by the usury law enacted in 1916. Mario Lamberte – 1988.

Beginning in 1972, The Bangko Sentral ng Pilipinas’ (BSP), known as the Central Bank in 1973.was given the authority and responsibility to regulate pawnshops. Presidential Decree 114 (29 January 1973) and the Central Bank Circular No. 374 (13 July 1973) set out specific regulations covering the operations of pawnshops.

Pawnshops are still among the least regulated businesses that fall under the authority the BSP. Under the BSP‘s regulations pawnshops are authorized to lend, but cannot accept deposits and are required to submit regular financial reports. The BSP has financial audit authority over pawnshops and can inspect book records and general business practices. It also has the authority to sanction a pawnshop.

The new rules are designed to enhance consumer protection and foster confidence in the pawnshop industry by the pawning public. For instance, proprietors, partners, incorporators, directors, stockholders and officers of pawnshops must meet certain “fit and proper” standards to ensure that pawnshops are owned and run by people without any derogatory record and to promote good governance. Pawnshops are now required to maintain a minimum level of capital or net worth in relation to their loan portfolio as the existing statutory capital of P100,000 has become too small and it is susceptible to the proliferation of “fly-by-night” operators.

Another reason pawnshops can provide these financial services to poor and low-income households is that their loans are backed by hard assets which lowers the transaction cost to the borrower and the lender and eliminates the need to analyze the borrower’s creditworthiness.

Over time the pawn item has changed. In the past, for example, Mario Lamberte noted (1988) that “pawnshops have preferred lees bulky items high-value items like jewelry. With the advent of more competition pawnshops have broadened the type of items they accept as collateral” (page 14). This change continues today with the acceptance of computers, cell phones and other electronic devices as collateral.

Because of the efficiency of pawnshop operations, they have been shown to be a profitable business. A study for the Philippine Institute for Development indicates that efficient management of pawnshops allows 25% of the gross operating income to flow to the bottom line as net profits (Lamberte, 1988).

The pawnshop industry in the Philippines has seen spectacular growth. This growth has largely been attributable to (1) the role that pawnshops serve in filling a demand that is not being filled by the more traditional banking system: It gets credit to those who don’t have access to traditional bank loans and (2) pawnshops operate with large profit margins. This has not gone unnoticed by small entrepreneurs and job seekers in the Philippines as they have flocked to the pawnshop industry.

Lamberte, Mario. An Analysis of the Role of Pawnshops in the Financial System. Manila: Working Paper Series no. 88-07, Philippine Institute for Development Studies, June 1998, 36 pp. http://www3.pids.gov.ph/ris/wp/pidswp8804.pdf

There’s still much space for expansion in the pawnshop business in the Philippines. Jean Henri D. Lhuillier, of Cebuana Lhuillier Pawnshop Companies, recently mentioned that “there is still room for expansion in the Philippines and the company is in fact growing by an average of 3% to 5% a year.” This room for expansion is on top of the enormous growth in this industry. Pawnshops have multiplied in number in recent years and have been posting fast-paced growth in terms of operations and revenues, which gave rise to a proposal to enact a new law regulating pawnshops (the existing law is PD 114).

The figures stated in the press release in connection with that bill reveals the following very interesting details:

Based on data from the Bangko Sentral ng Pilipinas (BSP), pawnshops provided a total of P10.1 billion worth of loans at the end of 2004 or almost double from the P5.5 billion worth of loans they extended in 1995.

As of November last year, according to BSP, there are 11,942 pawnshops operating in the country from only 4,173 pawnshops 10 years ago or in 1995. Furthermore, pawnshops’ total assets stood at P14.6 billion at the end of 2004, from only P7.7 billion in 1995. Moreover, pawnshops consolidated capital base considerably increased from P4.2 billion in 1995 to P7.7 billion in 2004.

How to register a pawnshop. A sole proprietorship, partnership or corporation may operate a pawnshop. The business entity must first be registered with the DTI (for sole proprietorship) or the SEC (for partnerships and corporations).The certificate of registration and other documents are then submitted to the Bangko Sentral ng Pilipinas (BSP). The filing/processing fee is P1,000. Of course, that does not include the filing fees for the SEC and the Mayor’s Office (for the Mayor’s Permit or business license). Provide for sufficient time up to the planned opening because papers will shuttle back and forth between the SEC and the BSP. The checklist of requirements on how to start a pawnshop business are posted at the BSP site.

Growth of pawnshops reflective of economy? Many, if not most, of us will have financial emergencies that can’t be covered by the existing savings. We borrow from relatives and friends, if we’re lucky. If not, we borrow from banks and similar financial institutions, but the lag time in processing the loan is foreign to the term “emergency”. One of the fastest way to procure money (no, not stealing), is through pawnshops. According to the same press release: “Pawnshops provide an alternative source of credit for small borrowers left unserved by banking and other financial institutions in the country, especially in cases of emergencies.” On the other hand, it could be said that the booming business reflects the current situation where the harsher economic life forces people to “pawn” properties just to have money for basic needs. Pawnshops may be one of those recession-proof businesses, but their proliferation may also be a warning sign of the economy’s health.

Another item from the Bangko Sentral ng Pilipinas (BSP) in 2009 that I believe deserves attention as we move into 2010 is that on April 30 the BSP approved a new set of rules to govern all pawnshops in the country.

According to the BSP, the new rules replace the existing implementing rules and regulations of Presidential Decree No. 114 also known as the Pawnshop Regulation Act issued in 1973.

The new BSP rules are designed to “enhance consumer protection and foster confidence in the pawnshop industry by the pawning public.” Some of the changes that are highlighted in the May 2009 media release are:

proprietors, partners, incorporators, directors, stockholders and officers of pawnshops must meet certain “fit and proper” standards to ensure that pawnshops are owned and run by people without any derogatory record and to promote good governance.

Pawnshops are required to maintain a minimum level of capital or net worth in relation to their loan portfolio. The existing statutory capital of P100,000 has become too small and it is susceptible to the proliferation of “fly-by-night” operators.

pawners have 90 days after maturity to redeem their pawned articles and pawnshops must notify their clients within the 90 day period before they can sell the pawned items in an auction. For the convenience of pawners, the new rules will require them to indicate in the pawn ticket their preferred mode of receiving the notice, whether by mail or courier to a given address, or by SMS or text through a specified mobile phone.

pawnshops will be required to comply with explicit “Know Your Pawner” procedures consistent with the requirements of the Anti-Money Laundering Act and to address concerns on the Anti-Fencing Law.

For transparency and to minimize malpractices, pawnshops will be required to post in their premises the Acknowledgement of Registration or Authority to Operate issued by the BSP, business days and hours of the pawnshop, their interest rate and charges for loans, among others.

The media release also points out that the “BSP signed a Memorandum of Agreement with the Department of Interior and Local Governments on the sharing of information between BSP and the city and municipal government units to ensure that only those that have the proper business permits and registered with the BSP are transacting with the public.”